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Fitch: Brazil's meat scandal could impact banks' loan-loss provisioning

Brazil's domestic banks could take a hit from the ongoing investigation into corrupt practices in the country's protein industry, Fitch Ratings said.

The rating agency estimates additional loan-loss provisioning of 15 billion Brazilian reais for banks in 2017, under a worst-case scenario where the "Carne Fraca" probe significantly impacts the protein sector.

Total loan-loss reserves are already predicted to rise this year after increasing to about 144 billion reais in 2016. Fitch noted, however, that it has not yet changed its base-case scenario for the banking sector's provisions due to the meat scandal and it is still too early to call the ultimate financial and economic impact of the investigation.

Fitch expects the forecast rise in provisioning to be manageable, with bank's liquidity and capitalization remaining intact due to years of deleveraging. However, the rating agency said that increased provisions would still present a challenge to the system's gradual recovery process, which continues to face other risks.

Public sector banks would likely have more increased provisioning than large private banks under the worst-case scenario, although this would not drive any ratings changes for the public banks given their ratings are tied to those of the sovereign, Fitch said.

The "Carne Fraca" scandal involves 21 companies who are accused of bribing federal meat inspectors, with federal police providing details of contaminated and adulterated meat, sparking import bans on Brazilian meat from several key markets.

As of March 29, US$1 was equivalent to 3.12 Brazilian reais.